Here is sample language for a total return unitrust, with comments,
provided by Pittsburgh attorney Robert Wolf, a leading advocate
of the trusts.
I give the residue of my estate to my trustee___ to hold as a
Total Return Unitrust under the following provisions:
A. During __________ life. My trustee shall pay the distribution
amount set forth below to or for the benefit of my ________ during
h_____ life, in quarter-annual installments.
B. Distribution amount. The trustee shall pay to my _____________
in each tax year of this trust during h_____ life an amount equal
to ______ (___%) percent of the average of the fair market values
of the trust as of the close of the last business day of the trust's
three previous tax years (or such lesser number of tax years as
are available for the first three tax years of the trust) (the
"distribution amount"). In the case of a short tax year, the distribution
amount shall be calculated as set forth in subparagraphC below.
In the case of contributions to or distributions from the trust,
including initial funding, the distribution amount shall be determined
as set forth in subparagraph D below. [Non-accrual alternative:
The obligation to pay the distribution amount shall cease with
the last regular payment before my ___________ death.]
C. Short year. For a short tax year, [including the year
of a beneficiary's death] the distribution amount shall be based
upon a prorated portion of the distribution amount set forth above,
comparing the number of days in the short tax year to the number
of days in the calendar year of which the short tax year is a
part. [Note: This accrual may be helpful in securing "present
interest" status for the annual gift tax exclusion, if that is
important.]
D. Contributions and Distributions. [This complicated
language is needed to accommodate multi-year funding of trusts
from estates and discretionary distributions in light of the three-year
smoothing rule.] In a tax year in which assets are added to or
distributed from the trust (other than the distribution amount)
(hereinafter "adjustment year"), the distribution amount shall
be increased (in the case of a contribution) or decreased (in
the case of a distribution) by an amount equal to ______ (___%)
percent times the fair market value of the assets contributed
or distributed (as of the date or dates of the contribution or
distribution), multiplied by a fraction, the numerator of which
is the number of days from the contribution or distribution to
the end of the calendar year, and the denominator of which is
the days in the calendar year. Further, the year end values for
the two tax years preceding the adjustment year shall be increased
by the amount of such addition, or decreased by the amount of
such distribution, for purposes of determining the distribution
amount for years following the adjustment year.
E. [Insert for QTIP, or delete and re-letter subparagraphs] If
in any tax year of the trust the net income of the trust exceeds
the distribution amount, such excess net income shall be distributed
to my ________ at least annually.
F. Computing Fair Market Value. [This allows a closely-held
business interest or real estate to be placed in the trust, but
the TRU is cumbersome for this type of asset.] All computations
of the trust's fair market value, or the value of any contributions
or distributions as set forth above, shall include accounting
income and principal, but no accruals shall be required. If the
trust includes assets for which there is not a ready market, the
trustee shall adopt such method of valuation as the trustee deems
reasonable in its discretion under the circumstances.
G. Income earned in estate prior to trust funding. In
addition to the distribution amount as determined above, the net
accounting income earned in my estate and allocable to the residue
shall be paid to the trust, and distributed to my _____________.
H. Source of distribution amounts. The distribution amounts
from the trust shall be paid from net accounting income. If the
net accounting income is insufficient to satisfy the distribution
amount, the trustees shall allocate to income such net realized
short-term capital gains as are needed to satisfy the distribution
amount, and if still insufficient, the trustees shall allocate
to income such net realized long-term capital gains as are needed
to satisfy the distribution amount. If, after allocating said
short-term and long-term capital gains to income, the income is
still insufficient to pay the distribution amount, the balance
needed shall be paid from the principal of the trust.
[It is not certain whether the IRS will respect this allocation
provision, although it should since the capital gains are "allocated
to income under the terms of the governing instrument." Reg. Sect.
1.643(a)-3(1). If not, all of the capital gains taxes will be
paid by the trust, as would be the usual case with a simple trust.
If you prefer that result, in order to allow the distribution
to be more tax free to the beneficiary, simply leave out this
subparagraph and that result should be assured. Please note that
in such case, or if the Service will not respect this provision,
you may wish to consider a distribution rate modestly lower to
have the same long term economic result as if the capital gains
tax liability were distributed out to the extent of distributions.
Our computer modeling suggests that .25% to .35% would be an appropriate
downward adjustment. Clearly this is cutting it pretty fine, but
there it is.]
I. Discretionary distributions of additional amounts.
In addition to the distribution amounts as set forth above, my
trustee shall distribute such additional amounts, if any, of accounting
income, capital gain or principal to my said _______________ as
the trustee deems advisable for my _______________'s health, maintenance
and support in h_____ accustomed standard of living, taking into
account other income or assets which are available to h_____.
[Comment: Discretionary distributions may be advisable for the
same reasons as they are in any trust. Consider giving an independent
trustee broader powers to enable beneficiary "to make estate planning
gifts," "for _______ welfare" or "for any purpose in which money
is needed."]
J. Death of ___________. On the death of my ______, the
trustee shall [pay any accrued distribution amount to my ____________'s
personal representative, and] distribute the balance in said trust
to my then living issue, per stirpes, subject to the Trust Continuation
Provisions hereinafter.
K. Goal of trust [Optional: and Corporate Trustee's Power
to Alter Distribution Rate.] The goal of this trust is to provide
an adequate and a relatively smooth flow of distributions, which
distributions over the anticipated term of the trust may to the
extent possible maintain or increase their real spending power
after inflation. A second and related goal is to maintain or increase
the real spending power of the trust both for the long term benefit
of my ___________ and also for the benefit of the remaindermen.
It is my intent by using a Total Return Unitrust, which is designed
to invest for total return, whether produced by accounting income,
short-term or long-term capital gains, to eliminate any conflict
the trustee might otherwise experience between attaining the two
goals set forth above. The distribution rate has been set at ______
(__%) percent based upon an expectation that over long periods
of time, this distribution rate can be maintained and still have
the distributions increase to [partially] offset [or more than
offset] inflation. [Optional: If 3% or less. If a higher rate
is used, use "to offset inflation as much as possible."] If this
goal is achieved, the trust estate will also have maintained [or
increased] [Optional: If 3% or less] its real value after inflation.
[Make sure the goals are practical given the rate you insert.
It is not a fair goal to expect a real increase after inflation
if you insert a rate of 5% or more.] These goals will not be attainable
every year, but will hopefully be attained over the long term.
I understand that to the extent discretionary distributions are
made in addition to the distribution amount that these economic
goals will be compromised. Nevertheless, the corporate trustee
shall not be liable for its good faith exercise of judgment in
distributing such funds.
[Optional: In making a determination concerning discretionary
distributions in addition to the distribution amount, my corporate
trustee/trustee___ may wish to take into account that the welfare
and support of my _______ is the most important goal of these
trusts, with the preservation and building of wealth for the next
generation of secondary importance.]
[Optional. If, as a result of permanent, substantial, and fundamental
changes in the investment marketplace, the corporate trustee,
acting alone, becomes convinced that the goals of the trust as
set forth above cannot be attained because of the specific percentage
distribution rates used for the distribution amount, the corporate
trustee shall have the discretion to change such rates. The foregoing
is intended to provide flexibility to the corporate trustee only
in the event of extraordinary and unforeseen change in the investment
marketplace from those markets experienced during the 20th Century.
The corporate trustee shall not be held liable for the good faith
exercise or non-exercise of this power.]
[Comment: Because the modeling of these trusts demonstrates that
they work well and predictably for the periods 1926-1998, 1960-1998
and 1973-1998, it is not clear that this discretion is needed,
or even wise. It may, however, give clients an added level of
comfort – no small thing.]
2. Executors'andtrustees'powers. In addition to the powers
conferred by law, my execut____ with respect to my estate, and
my trustee, with respect to any trust, shall have the following
powers, to be exercised in their absolute discretion, without
the necessity of application to any Court, in the capacity to
which such powers may be applicable: [Optional: except that they
shall have no power as to the Marital Trust which would disqualify
it for purposes of the marital deduction]
[Customary Provisions Omitted]
* * *
B. Investments. To invest in any type of investment that
plays an appropriate role in achieving the investment goals of
the trust, which investment shall be considered as part of the
total portfolio. It is my specific direction that no category
or type of investment shall be prohibited. I specifically do not
wish to limit the universe of trust investments in any way other
than is dictated by the trustee's exercise of reasonable care,
skill, and caution. In connection with the trustee's investment
and management decisions with respect to this trust, the trustee
is specifically entitled to take into account general economic
conditions, the possible effect of inflation or deflation, the
expected tax consequences of investment decisions or strategies,
the role that each investment or course of action may play within
the overall trust portfolio that may include financial assets,
interests in closely-held enterprises, [Note – consider valuation
problems here] tangible and intangible personal property, and
real property; [Note – valuation problem] the expected total return
from income and the appreciation of capital; other resources of
the beneficiaries, the needs for liquidity, regularity of income
and preservation or appreciation of capital, and the asset's special
relationship or special value, if any, to the purposes of the
trust or to one or more of the beneficiaries. Nor shall my trustee
be limited to any one investment strategy or theory, including
modern portfolio theory, the efficient markets theory or otherwise,
but should be free to consider any appropriate investment strategy
or theory under all the circumstances. [Insert for QTIP: Should
the trustee invest in property which is unproductive, my spouse
shall have the right to require the trustee to convert the same
into productive property within a reasonable time.] [Consider
provisions for personal use property such as residential real
estate or tangible personal property. If such property is contemplated,
it should not be included in the market value of the trust for
determining the distribution.]
C. Delegation. The trustee may delegate investment and
management functions that a prudent person of comparable skills
would properly delegate under the circumstances. Should the trustee
delegate such function, the trustee shall exercise reasonable
care, skill, and caution in selecting an agent, establishing the
scope and terms of the delegation consistent with the purposes
and terms of the trust, and periodically reviewing the agent's
actions in order to monitor performance and compliance with the
terms of the delegation. Should such delegation occur as set forth
above, the trustee that complies with the requirements for delegation
shall not be liable to the beneficiaries or to the trusts for
the decisions and actions of the agent to which the function was
delegated, but by accepting the delegation of a trust function
by the trustee of this trust, the agent submits to the jurisdiction
of the courts of this state. [Most of this paragraph is imported
from the Uniform Prudent Investor Act.]
* * *
I. Reformation. The corporate trustee, acting alone and
in its sole discretion, shall have the power to reform this instrument,
with or without Order of Court, in order to make any changes necessary
so as to preserve and make the best use of the marital deduction
for federal estate tax purposes, the exemption from generation-skipping
transfer tax, or to carry out my intent regarding the allocation
of capital gains to income as prescribed in this will. Any provisions
of this will shall be interpreted or reformed so as to preserve
these benefits and carry out my intent wherever possible, provided
that such interpretation or reformation does not do violence to
my primary intent to provide for my spouse and my children.
Copyright 2000 by Robert B. Wolf. Republished by permission.
